Key Governance Developments - January 2021
Europe, UK and Japan tighten corporate governance requirements
The European Commission has drawn lessons from the collapse of German payment services group Wirecard, proposing tighter regulation of corporate governance as well as external controls such as audit requirements, which would make reporting requirements stricter and strengthen the exchange of information between authorities. Another corporate failure, of British construction firm Carillion, which left major public-sector infrastructure projects in chaos, has prompted the UK authorities to draw up more demanding standards for the evaluation of board performance. In Japan, the Tokyo Exchange and proxy advisers are looking to clamp down on the longstanding problem of cross-shareholdings between major listed companies, which activists say reduces the ability of minority shareholders to demand corporate change.
Commission proposes improvements to governance, audit and supervision framework following Wirecard collapse
The European Commission has proposed improvements in regulations regarding corporate governance, auditing and supervision in the wake of the Wirecard collapse, to make reporting requirements stricter and strengthen the exchange of information between authorities. In a so-called non-paper for the EU Council's Financial Services Committee, the Commission says the collapse of the Munich payment group also raises broader questions about bank supervision, regulation of payment providers and other fintech firms, and efforts to curb money laundering.
Best source: Börsen-Zeitung (subscription required, in German)
Tokyo exchange changes could force sale of cross-shareholdings
A restructuring of the Tokyo Stock Exchange and new guidelines from proxy advisers could lead to Japanese companies being obliged to sell down their cross-shareholdings before the end of the country's financial year in March. The exchange is reducing its six boards to three prime, standard and growth tiers, and companies seeking to remain in the prime index will have to comply with new rules on free-float market capitalisation, which excludes cross-holding shares. Proxy adviser ISS now advises investors to vote against directors at companies with more than 20% of their equity represented by cross-shareholdings, while Glass Lewis has set its limit at 10%.
Best source: Financial Times (subscription required)
Auditor institute rates US corporate governance as B-
The Institute of Internal Auditors and the University of Tennessee have rated the average corporate governance at US companies as B-, with a score of 82 out of 100, up slightly from 79 the previous year. Their study found that amid a period of heightened risk due to the Covid-19 pandemic, companies in regulated industries such as financial services and utilities have demonstrated stronger governance.
Best source: Accounting Today
See also: Institute of Internal Auditors
Review recommends code of conduct for external UK independent board evaluations
A report by the Chartered Governance Institute, commissioned by the UK's Industry Ministry following the collapse of construction group Carillion, has recommended that the requirements of independent board evaluations at British companies be tightened. Although it acknowledges that there have been no widespread market failures, the institute has recommended the introduction of a code of conduct covering competence, capacity, independence, integrity, client engagement and client disclosure. External board reviewers should publicly commit themselves to compliance with the code.
Best source: Financial Times (subscription required)
See also: Chartered Governance Institute
Samsung vice-chairman imprisoned for bribery after retrial
Samsung Electronics vice-chairman Lee Jae-yong has been sentenced to 30 months' imprisonment for bribery of an associate of South Korea's former president, Park Geun-hye, following a retrial. Lee was previously sentenced to five years in prison in 2017, but was freed after an appeal that saw the jail term reduced and then suspended. He has promised to continue to support Samsung’s independent compliance committee, launched last year, but the appeal court did not consider the body effective enough to mitigate Lee's wrongdoing.
Best source: Reuters
See also: Economic Times
Nasdaq proposes rule requiring listed companies to boost board diversity
The Nasdaq stock market has proposed a rule change that would require most of its 2,500 listed companies to have at least one board member who is a woman and another who is black, Hispanic, native American, LGBTQ+ or a member of another under-represented group. Companies that do not comply will have to explain their failure to follow the diversity requirement. The proposal will require permission from the Securities and Exchange Commission, but leading asset managers including BlackRock, Vanguard and State Street Global Advisors have already said they may divest from companies that do not embrace board diversity and other environmental, social responsibility and governance issues, while Goldman Sachs has stopped underwriting IPOs for companies in the US and Europe that do not have at least one diverse director.
Best source: S&P Global Market Intelligence
Asset managers warn against UK dual share class proposal for London exchange
The UK Investment Association has warned that government plans to change listing rules for the London Stock Exchange could damage the principle of one share, one vote. The government is considering reducing the free float requirement for the exchange's main board from 25% to 20% and authorising dual-class share structures in order to attract more fast-growing technology companies to list in London. The asset managers' body instead recommends that digital technology should be introduced to speed up the listing process, and says that if the reduced 20% free float threshold is adopted, companies should be required to comply with a 25% minimum within three years.
Best source: Sky News
Malaysian palm oil industry faces restrictions under EU sustainability plans
Paolo Vergano of Brussels law firm FratiniVergano says the Malaysian palm oil industry must engage with the EU and UK authorities over plans to restrict the distribution of products that involve deforestation and poor land use in the European single market. The EU initiatives on sustainability in forests, food, farming, land use and supply chains will target palm oil production directly or indirectly because of its role in deforestation. The EU’s initiative to improve governance and the integration of sustainability by the food industry, as part of the European Green Deal and the EU’s Farm to Fork strategy, will also affect the palm oil industry.
Best source: Malay Mail
BlackRock votes against directors’ re-election at Top Glove over migrant employee conditions
BlackRock has voted against the re-election of six independent directors at Malaysian personal protection equipment manufacturer Top Glove over concern that the health and safety of migrant workers has been flouted during the Covid-19 pandemic. BlackRock, which holds 1.61% of the company’s stock, says Top Glove has failed to introduce policies to protect the health of employees living in corporate dormitories. However, all six directors were re-elected.
Best source: The Edge
Korean regulator investigates law breaches in lending to Samsung Securities executives
South Korea's Financial Supervisory Service is to launch a full-scale inquiry into allegations that the country's largest brokerage firm, Samsung Securities, breached financial market legislation by lending to its executives between 2015 and 2018. Park Yong-jin of the Democratic Party of Korea says the company lent more than KRW10bn ($9.1m) to executives at subsidiaries, contravening the Capital Market Act ceiling of KRW100m. The regulator will also look at Samsung Securities' compliance with rules governing areas including corporate governance, internal control systems, financial stability and consumer protection. The firm was previously subjected to a comprehensive inspection in 2018 after it mistakenly paid stocks rather than cash as dividends to employees.
Best source: Korea Herald